the rennie landscape - Spring 2022

rennie landscape spring 2022

Dear Reader, Welcome to the Spring 2022 edition of the rennie landscape. In the opening letter of the previous edition of this report, we said we were looking forward to feeling genuinely positive about where we would be in our 2-year pandemic odyssey when it came time to pen this edition. And you know what? We do feel positive. While Covid-19 is not entirely a thing of the past, we’re coping— dare we say almost thriving—with many pandemic restrictions being lifted and the cadence of our lives and the economy returning to what we were accustomed to prior to March 2020. People have returned to work, if not completely back to the office on a full-time basis. Employers feel positive about business conditions and want to hire (though it’s a challenge), portending robust economic growth to come. A combination of how we have managed the pandemic here in British Columbia, combined with the lifestyle opportunities that exist and the resilience of our economy, have together conspired to attract people from far and wide to our province and its regions. The foundation for a fruitful future has been laid. Challenges exist to be sure. Housing is more expensive than ever, and there are more economic headwinds (rising interest rates, inflation, and growing debt) and heightened geopolitical uncertainty than 6 months ago. But on balance, each of Canada, British Columbia, and Metro Vancouver is poised for a period of continued prosperity that together we must ensure is shared by everyone. We hope you enjoy this latest edition of the rennie landscape.

Ryan Berlin DIRECTOR OF INTELLIGENCE & SENIOR ECONOMIST rberlin@rennie.com

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contents

ECONOMY

RATES

CREDIT & DEBT

DEMOGRAPHICS

HOUSING

POLICY

KEY INSIGHTS

GET THE DATA

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economy

01. economy Labour markets across Canada have bounced back to where they resemble their pre-pandemic selves. Still, there’s room to grow.

WAKING UP AFTER A TWO-YEAR SLUMBER

The unemployment rate has, arguably, been the single most representative measure of how our economy has fared since the early days of the pandemic. At the very least, it has summed-up complex and changing economic and labour market dynamics at various points during the saga we have collectively endured since early-2020. For starters, regional unemployment rates across Canada in the lead-up to the pandemic were at, or near, all-time lows (in Metro Vancouver the unemployment rate was 4.4%—the lowest in the country at the time), reflecting continued employment growth against the backdrop of an aging population. Then we were hit by Covid-19, so we shut down huge swathes of our economy (ushering in the “Great Suppression”) and, predictably, Canadian unemployment rates shot skywards. In most cases, they reached effective all- time highs (“effective” because you’d have to go back to the Great Depression to find higher rates); in Metro Vancouver,

the share of unemployed persons in the labour force peaked at 13.3%. After many months of a steady tightening of labour markets as our economy has re-opened and normalized, unemployment rates are— finally—back at, or close to, where they were before the pandemic. In the case of Metro Vancouver, this means an unemployment rate of 5.4%, keeping the region on course for an unemployment rate close to 4.0% by the year’s end. Of course, it’s worth remembering that while the experience of the past two years (a softening of labour markets) was always going to be transitory to some degree, our population and labour force continued on its inexorable aging trajectory, with everyone getting one year older each year. Looking ahead, these same demographic forces will continue to push unemployment rates downward in Canada and across the developed world.

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economy

OUT WITH THE PANDEMIC—AND IN WITH THE ENDEMIC—UNEMPLOYMENT RATES

18%

16%

15.9%

15.6%

15.0%

14%

13.5%

13.3%

12%

10%

8.7%

8.0% 7.8%

8.0% 6.9%

7.4%

5.5% 5.2%

5.4%

5.4% 4.4%

4.9% 4.6%

VANCOUVER

EDMONTON

CALGARY

TORONTO

OTTAWA

MONTRÉAL

PREPANDEMIC FEB ‘

PANDEMIC PEAK JUN ‘

CURRENT FEB ‘

DATA: THREE-MONTH MOVING AVERAGE, SEASONALLY-ADJUSTED UNEMPLOYMENT RATES SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

JOBLESS NO MORE FOR FEWER Metro Vancouver’s plummeting unemployment rate reflects a significant reduction in the number of unemployed people in the region, with many implications.

As unemployment spiked during the early months of the pandemic, it reflected, well, a spike in the number of unemployed persons. While this might seem unworthy of stating, it is indeed possible during more stable economic periods for the unemployment rate to rise as the number of unemployed persons falls, and vice versa. Without getting into the weeds on this, it’s because the unemployment rate is calculated with the labour force as the denominator; consequently, the rate of unemployment is influenced by how many people decide to enter the labour force

(which tends to nudge the unemployment rate up) or leave it (nudging the rate down). When gauging the health of the labour market it’s therefore useful to consider how many real-life unemployed people there are at a point in time. Here the news is also good for Metro Vancouver, with the 82,000 unemployed persons in January down 63% from the pandemic high of 218,700, and now only 16% higher than the February 2020 level. That we’re seeing a reduction in the number of people that want to work but can’t find work is certainly a positive trend.

UNIMPRESSIVE UNEMPLOYMENT (IT’S A GOOD THING)

250,000

218,700

200,000

143,300

150,000

101,300

100,000

70,400

82,000

50,000

Feb Mar Apr May

Jul Jun Aug Sep Oct Nov Dec

Jul Jun Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Feb Jan

UNEMPLOYED DIFFERENCE VS. FEB ‘

NUMBER OF UNEMPLOYED

DATA: NUMBER OF UNEMPLOYED PERSONS MONTHLY, METRO VANCOUVER

SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

FULL-TIME COMMITMENT TO PART-TIME WORK To some, part-time work has negative connotations; the reality is that it plays an important role within any dynamic labour market.

There are numerous reasons why someone might not choose to work full-time: to pursue further education, care for a loved one, recover from an illness or injury, or simply because it’s a personal preference. Of course, some people work part-time because they can’t find full-time work—and if this share is high or rising, it’s indicative of labour market weakness. This makes sense: if people are willing and able to contribute to the economy in a capacity greater than their current utilization but they can’t find an opportunity to do so, there exists an opportunity cost.

The good news is that since August 2021, the number of part-time workers who would have preferred full-time work has accounted for less than 20% of all part-time workers, most recently falling to 14%. This contrasts against an average of 23% during the balance of the pandemic, and a high of 26% in July 2020. The current share is now consistent with its long-run (pre-pandemic) level—yet another piece of evidence that our labour market is functioning more efficiently today than it has at any point over the past two years.

NOT UNREASONABLE REASONS FOR WORKING PART-TIME

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

Feb Mar Apr May

Jul Jun Aug Sep Oct Nov Dec

Jul Jun Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jan Feb

COULD NOT FIND FULLTIME WORK

OTHER REASONS

DATA: PROPORTION OF PART-TIME WORKERS BY REASON FOR PART-TIME, MONTHLY, BC SOURCE: LABOUR FORCE SURVEY, STATISTICS CANADA

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economy

THE OFFICE-IAL EMPLOYMENT FIGURES ARE IN The benefits of working remotely were never made clearer than during the worst of the pandemic. It seems the benefits of office-based working are clear now, too.

Statistics Canada doesn’t maintain official estimates of “office-based” employment. On the one hand, this makes it difficult to objectively assess how the pandemic impacted such white-collar jobs; on the other hand, it provides us dataphiles with an opportunity to problem-solve. Using data on occupations (that is, classifying people by what they do as part of their jobs— as opposed to what their employer produces, which defines industry classifications of employment), we’ve grouped employment into office and non-office roles and examined how these two broad groups of jobs have been faring over the past couple of years. Interestingly—considering the popular narrative around office-based employment evolving into something of a relic—the data for Metro Vancouver show that office-based employment has not only been resilient over

the past two years, but it has grown by more than non-office roles. Specifically, this region lost only 50,000 office-based jobs in the first few months of the pandemic, versus 182,000 jobs lost in the rest of the economy. And since then, office-based employment has grown by 134,000 jobs versus 121,000 in non-office environments. In the last year, 53,000 jobs have been added in office-based settings compared to only 16,000 elsewhere. Of course, not all of these office-based jobs are as synonymous with actual office settings as they were before we realized that many jobs could be performed (with mixed results) remotely. However, it’s clear that this category of employment remains a keystone of our economy, and is likely to remain as such for a long time to come.

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economy

GREATLY EXAGGERATED "REPORTS OF THE DEATH OF": THE OFFICE (JOB)

150

134

121

100

-19

-50

-100

-150

-182

-200

MONTHS PREPANDEMIC

EARLYDAYS PANDEMIC

RECOVERY TODATE

PAST MONTHS

NONOFFICE

OFFICE

SOURCE: STATISTICS CANADA. TABLE 14-10-0381-01 DATA: EMPLOYMENT BY OCCUPATION, THREE-MONTH MOVING AVERAGE, UNADJUSTED FOR SEASONALITY

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economy

A HEADWIND TO ECONOMIC GROWTH? While there is lots to feel good about when it comes to labour markets in Canada generally and here in British Columbia specifically, not all aspects of the job market are faring as well as we might hope. Somewhat paradoxically, job vacancy rates—calculated as the number of positions that are unfilled as a share of all filled and unfilled positions—are at all-time highs across the country and across sectors, despite the existence of (a modicum of ) slack in our labour market. Nationally, the job vacancy rate most recently sits at 5.3%, up from 3.0% prior to the pandemic, while in British Columbia it’s reached 6.1%, up from 3.8%. While the focus of this section is on BC, it’s worth noting that Metro Vancouver’s job vacancy rate sits at 6.0%, up from 4.2%. What does this matter? Well, because all else being equal, the higher the job vacancy rate, the more employment and economic growth

are being held back from the level they’d naturally gravitate towards (which, perhaps said needlessly, would be higher than our current experience). Digging into the sectoral breakdown of these vacancy rates shows that not all industries are suffering equally. In an ironic twist, accommodation and food services— the sector hit hardest during the worst of the pandemic—has far and away the highest job vacancy rate in the province, at 11.3%, as restaurants and hotels struggle to replace previously-lost staff at the same time that Covid restrictions are easing. A concerning figure for supply-side housing market prospects is the 8.5% vacancy rate in construction, which is up from 5.3% prior to the pandemic. The good news? With migration picking up and government financial supports lessening, there will be more workers to fill these positions in the coming months.

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economy

The Great Mismatch between the people employers need and the jobs people want may be reaching its apex as job vacancies in BC and Canada soar.

NOW HIRING: EVERYONE, EVERYWHERE

12%

11.3%

10%

8.5%

7.1%

6.8%

6.1%

6.0%

5.2%

4.0%

3.8%

3.0%

SOURCE: STATISTICS CANADA. TABLE 14-10-0326-01 DATA: JOB VACANCY RATE BY INDUSTRY SECTOR, QUARTERLY, UNADJUSTED FOR SEASONALITY, BC

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economy

ABSENCE MAKES THE HEART GROW FONDER As the competition for talent intensifies, employers are offering more compensation—but is it enough?

Since data were first collected on wages offered for vacant positions in British Columbia (in Q1 2015), said offered wages have risen faster than those for filled positions. This is a somewhat intuitive observation when one considers the labour market context during this recent past—namely, that unemployment rates have been declining (the pandemic spike notwithstanding). In other words, an increasingly tight labour market here in BC—which is associated with fewer idle workers—has compelled employers to raise the compensation needed to attract workers to their organization at a relatively robust pace. Between Q1 2015 and Q1 2020, for example, the average offered hourly wage (for vacant positions) rose by 21.5%; in comparison, the median hourly wage (for those in employment) rose by only 13.0%.

This trend characterized much of our pandemic experience, too. Indeed, from Q1 2020 to Q1 2021, the average offered hourly wage for vacant roles jumped by 7.4%, compared to an only 3.5% lift for those in jobs. Since then (through Q4 2021), the narrative has changed slightly, with the offered wage rate for unfilled roles falling by 2.2%, while that of filled positions rose by 2.0%. Is this the beginning of a new trend, or merely a blip in the established historical trend? We can’t say for sure at this point, but an increasingly tight labour market points to continued elevated wage pressure for roles that employers are looking to fill.

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economy

OFFERED WAGES SOAR IN THE HOPES OF HIRING MORE

140

130

NO DATA

120

110

100

Q1 Q2 Q3 Q4

Q1 Q2

Q1 Q2 Q3 Q4 Q3 Q4

MEDIAN HOURLY WAGE RATE

AVERAGE OFFERED HOURLY WAGE

SOURCE: STATISTICS CANADA. TABLE 14-10-0063-01 & 14-10-0326-01 DATA: MEDIAN HOURLY WAGE RATE & AVERAGE OFFERED HOURLY WAGE FOR VACANT JOBS, BC

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economy

CONDITIONALLY POSITIVE Despite clouds of uncertainty beginning to settle over our economy, Canadian businesses maintain positive views of the landscape ahead.

First, the good news: according to a recent (Q4 2021) survey by Statistics Canada, 72.6% of polled Canadian businesses indicated that they were optimistic about conditions over the coming 12 months. Within this group, 1 in 3 said they were “very” optimistic. All good, right? Well, sort of. Economic headwinds are blowing increasingly intensely these days due to the uncertainty created by variety of factors such as heightened inflation, rising interest rates, a red-hot housing market, and war in Europe. Many of these were present at the end of last year, too, which one

can surmise is part of the reason why business optimism actually fell between Q3 and Q4 2021. It might be nitpicking, especially given the harsh economic climate we all experienced in 2020, but the proportion of businesses who said they were optimistic about future conditions actually fell from 75.7% in the final quarter of 2021, with the share of businesses indicating a degree of pessimism rising from 10.9% to 14.3%. Having said this, the economy's tailwinds are likely to outblow its headwinds over the coming year, portending brighter days ahead.

THE FUTURE’S BRIGHT WITH THE PANDEMIC’S END IN SIGHT

very optimistic 21.9%

very pessimistic 2.7%

somewhat pessimistic 11.6%

surveyed in Q 4 2021 indicated they were optimistic about the next 12 months 72.6% OF BUSINESSES

uncertain 13.1%

somewhat optimistic 50.7%

DATA: PERCENTAGE OF POLLED BUSINESSES INDICATING AN OPTIMISTIC, NEUTRAL, OR PESSIMISTIC OUTLOOK SOURCE: STATISTICS CANADA, CANADIAN SURVEY ON BUSINESS CONDITIONS

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economy

OPTIMISM ABOUNDS After two years characterized by adversity and uncertainty, Canadian businesses expect economic conditions to be favourable in the year ahead. ›

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rates

02. rates

Interest rates are on their way up—in fact, they’ve been moving up for more than a year now—but fears of ultra-high rates are overblown.

IT’S ALL RELATIVE

The most common refrain in conversations about interest rates these days is that they “are going to rise”. Excuse me? I don’t mean to be rude, but…everyone is aware that interest rates—at least some of them, i.e. the ones that matter in a housing market context—have been rising for more than a year, right? Sure, since the Bank of Canada slashed its trend-setting rate to almost zero at the beginning of the pandemic it has stood pat— until its early-March meeting, when it raised its rate from 0.25% to 0.50% (as everyone expected they would). Having said that, five-year Government of Canada bond yields, which most directly influence five-year fixed mortgage rates, the rate structure of choice for most Canadians, have been moving up since the beginning of 2021. Specifically, the yield on said bonds rose from 0.41%

in January 2021 to 1.67% most recently; at the same time, average discounted mortgage rates have risen from 1.79% to around 2.0%. Against this backdrop of rising rates, Metro Vancouver set all-time records for resale counts, pre-sale counts, and prices. This is important context for future rate increases. Speaking of which, we expect bond yields and fixed mortgage rates to continue to rise, albeit modestly, over the next year as the Bank of Canada fights to get high inflation under control. On this front, the Bank will likely increase its target rate back to its pre- pandemic level by early-2023 before pausing to assess its impacts. Should supply chains and consumer price changes normalize during this period, any further increases, if realized, are likely to be marginal.

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rates

BANK ON FURTHER INCREASES

5.69%

the great suppression MARCH

3.58%

1.79%

0.50%

-1%

BOC POLICY INTEREST RATE

CMHC BENCHMARK MORTGAGE RATE

YEAR GOC BOND YIELD

ANNUAL CONSUMER PRICE INFLATION

SOURCE: STATISTICS CANADA DATA: SELECTED INTEREST RATES AND CANADA’S ANNUAL RATE OF CPI CHANGE

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rates

THE COST OF RISING INFLATION Everything costs more today than it did a year ago, but how much more you’re actually paying depends as much on where you live as what you buy.

Ok, per the above, we admittedly got sucked into another common refrain, this time the one about everything costing more today than it did a year ago. Clichés aside, the truth is, pretty much everything costs more every year; it’s just a matter of degree. Inflation itself isn’t a bad thing, or harmful; it’s actually desirable if it occurs at a moderate level and is stable, as it allows households to more ably allocate their spending and saving, and business to plan for the future. What’s been happening lately is not just that we have inflation here in Canada (and by the way, inflation is not just a Canadian thing—it’s a monetary stimulus/fiscal stimulus/supply chain/demand-driven thing that’s happened all around the world), but that prices are rising

at an uncomfortably high rate. Nationally, the most recent inflation rate is 5.7%, well above the Bank of Canada’s target of 1-3%. That said, inflation rates are not equal within the country, ranging from a high of 7.4% in Prince Edward Island to a low of 4.7% in both Saskatchewan and here in BC—below the national average, but still uncomfortably high. As alluded to in the previous section, the Bank of Canada will not stand idly by, having already raised its inflation-fighting interest rate by 25 basis points in March. With the goal of imparting on our currency the feature of store-of-value consistency, further interest rate increases are both expected and welcomed.

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rates

A DIVERSE LANDSCAPE OF CONSUMER PRICE INFLATION IN CANADA

8.0%

7.4%

7.0%

5.7% NATIONAL RATE

6.1% 6.1%

6.0%

5.7%

5.5%

5.4%

5.1%

5.0%

4.7%

4.0%

3.0%

2.0%

1.0%

0.0%

ON MB

PEI

SOURCE: STATISTICS CANADA. TABLE 18-10-0004-02 DATA: ANNUAL RATE OF CPI CHANGE BY PROVINCE

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rates

It’s horses for courses when it comes to inflation, with the price escalation experience varying significantly from coast-to-coast.

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rates

TOO MUCH MONEY CHASING TOO FEW THINGS Inflation isn’t as uniform and ubiquitous as it is often treated. As noted in the previous section, consumer prices rise more quickly or slowly in different parts of the country. Additionally, the specific inflation rate any one individual faces reflects their particular spending patterns, and whatever the measure of inflation, it’s always a function of how prices are changing for the individual components in the consumer price index (like lemons and consulting services). On this latter point, the annual change in the price of services in Canada has been quite stable over the past decade, oscillating between 1-3% leading up to the pandemic.

Goods inflation, on the other hand, has been much more volatile—reflecting the prices of things like gasoline and food, both of which fluctuate considerably—ranging from periods of deflation to increases of up to 4.6% (again, in the decade leading up to the pandemic). Today, inflation in goods is at 7.6%, while that of services is at 3.8%. Both are uncomfortably high, but for now headline inflation is really being driven by the demand for products whose supply chains, in many instances, are hobbled. As this glitch in the matrix is mended through this coming year, price gains will ease.

INFLATION: IT’S (MOSTLY) ALL GOODS

8.0%

7.6%

the great suppression MARCH

6.0%

4.0%

3.8%

2.0%

-2.0%

-4.0%

GOODS

SERVICES

DATA: ANNUAL CHANGES IN CONSUMER PRICE INDEX GOODS AND SERVICES, MONTHLY, NOT SEASONALLY ADJUSTED

SOURCE: STATISTICS CANADA. TABLE 18-10-0004-01

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rates

YIELDS BONDED IN THEIR RISE We’re not in inverted yield curve territory yet, but there is reason to expect an economic slowdown after a robust pandemic recovery.

Investors who fear risk seek bonds—and more specifically, government bonds, which are deemed to be about as risk-free an investment as there is in Canada. They also typically have relatively low returns (hey, you get what you pay for). Bonds really did return absurdly low levels over the past year-plus, with 2-year Government of Canada bonds yielding only 0.16% in January 2021, down from 2.33% in October 2018 (the recent high). Similarly, 10-year bond yields dipped in December 2020 to 0.7% (as in, give me $1,000 for 10 years

and for that privilege I will pay you $7 (!) annually over that period). The spread, or difference, between these rates is often seen as indicative of what lies ahead for our economy. When short-term yields (like the 2-year ones) are higher than the longer-term ones (the 10-year), the so-called “yield curve” is said to be inverted—a sign of a looming economic slowdown or recession. In Canada we flirted with that scenario in early-2020, and though we’re not there now, this is something to watch as uncertainty clouds our economic picture over the coming couple of years.

DO BONDS YIELD INSIGHTS INTO OUR ECONOMIC FUTURE?

3.0%

2.5%

2.0%

1.97% 1.57%

1.5%

1.0%

0.5%

0.40%

0.0%

-0.5%

-1.0%

GOC BENCHMARK YEAR BOLD YIELDS

GOC BENCHMARK YEAR BOND YIELDS

YEAR YEAR YIELD SPREAD

SOURCE: BANK OF CANADA DATA: YIELDS ON 10-YEAR & 2-YEAR GOVERNMENT OF CANADA BONDS, MONTHLY

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rates

BEWARE THE YIELD CURVE INVERSION? This is an atypical economic epoch, so typically- ominous metrics—like 2-year yields surpassing 10-year ones—may not carry the same weight as in the past. ›

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credit and debt

03. credit & debt Mortgage debt in Canada is soaring—which is exactly as you might expect when the cost of borrowing remains near historical lows.

MORTGAGING THE FUTURE?

The whole point of lowering interest rates, if you’re a central bank and you can do such a thing, is to both disincentivize saving and encourage borrowing and spending. You do this when inflation is “too” low and/or when the rate of economic growth is sluggish. (Conversely, central banks raise rates when, primarily, they want to cool off inflation. Like we’re seeing now.) This typically leads to rising prices, growing production and employment, and falling unemployment rates. It can also pump asset values. Part, but not all, of the reason for the rapidly- rising house prices we’ve seen over the past two years has been due to historically-low interest rates, which have allowed households to afford more expensive homes for a given income and savings/wealth combo. This, in turn, has led to a rise in the rate of mortgage debt accumulation.

Specifically, Canadians added $196 billion to their total debt stack over the past four quarters ending in Q4 2021, which was up by 100% compared to the $98 billion growth of the previous four quarters (ending Q4 2020). Mortgage debt growth accounted for almost all of the total debt increase over the past year (96% of it, to be precise), with consumer credit and non-mortgage debt growing only marginally. As the next section explains, this is not as worrying as it first appears, as interest rates remain extremely low. That said, households will have to tighten their collective belts in the months and years ahead—but likely only a notch or two.

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credit and debt

DON’T LET THE (RISING) DEBT GET TO YOUR TÊTE

$80

2021 total +100% year-over-year $196 BILLION

$70

$60

2020 total +5% year-over-year $98 Billion

$50

$40

$30

$20

$10

-$10

-$20

-$30

Q1 Q2 Q3 Q4

Q1 Q2

Q1 Q2 Q3 Q4 Q3 Q4

MORTGAGES

NONMORTGAGE LOANS

CONSUMER CREDIT

SOURCE: STATISTICS CANADA. TABLE 36-10-0579-01 DATA: HOUSEHOLD DEBT BY TYPE, QUARTERLY, CANADA

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credit and debt

ENDS MEET DESPITE BULKIER BALANCE SHEETS Despite rising debt, households are better positioned to afford it than they have been in close to two decades.

The best, but not the only, measure of how well households can afford what they owe is the debt service ratio (DSR), or the proportion of disposable income that is spent on paying back loans. While Canadian mortgage and non-mortgage DSRs have generally risen over the two decades, they are clearly and directly impacted by changes in interest rates: when borrowing becomes cheaper, a lesser share of income is spent servicing that debt; when borrowing becomes more expensive, the opposite is true.

The current DSR of 13.8% is up from the pandemic low of 12.2%, but it’s below the pre-pandemic high of 15.0%, which also matched the two-decade high achieved back in 2007. The mortgage DSR, at 7.2%, is near its 20-year high due to rising debt loads, while the non-mortgage DSR recently dipped below the mortgage DSR for the first time, currently sitting at 6.7%. These metrics will rise this year, squeezing Canadians’ pocketbooks at the margin. But with interest rate increases likely to be measured and modest, we can handle it.

IT’S NOT WHAT YOU OWE, BUT RATHER, CAN YOU PAY AS YOU GO?

16%

15.01%

15.02%

14%

13.84%

12%

12.25%

11.71%

10%

8.74%

7.86%

6.69% 7.15%

6.47% 5.24%

6.27%

6.01%

4.50%

1.75%

2.00%

0.25%

NONMORTGAGE DEBT

MORTGAGE DEBT

TOTAL DEBT

BOC TARGET RATE

SOURCE: STATISTICS CANADA. TABLE 11-10-0065-01 DATA: PROPORTION OF DISPOSABLE INCOME GOING TO DEBT SERVICE, CANADA

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credit and debt

BC AHEAD IN NOT FALLING BEHIND With interest and unemployment rates both near their historical lows, provincial housing markets continue to project sturdiness.

Housing markets in the United States have always differed from those here in Canada. For example, down there, borrowers can access 30-year fixed mortgage rates; here, we tend towards 5-year terms. In the past, US banks have handed out so-called NINJA loans (“no income, no job, no assets”); here, mortgage qualification rules have been much stricter. And finally, a key feature of US mortgages is that they are “non-recourse”, whereas up here we have “recourse” loans. This is an important feature because it means unlike in the US where homeowners can literally leave the keys in the

door and walk away from a home that is underwater, such a situation here in Canada would require a homeowner to make the lender whole. All of this is to say we have always had lower mortgage arrears rates in Canada, so the fact that they are still low today is not news in and of itself. However, BC’s 0.13% arrears rate is something to be proud of, as it’s ⅓below the national average of 0.19% and down from 0.17% one year ago. As far as this metric of housing is concerned, our market gets a clean bill of health.

BC’S RATE OF ARREARS IS MUSIC TO OUR EARS

0.7%

0.6%

0.50%

0.5%

0.46%

0.42%

0.4%

2021 national rate 0.19% from 0.25% in 2020

0.3%

0.27%

0.26%

0.23%

0.20%

0.2%

0.15%

0.13%

0.1%

0.08%

0.0%

PEI

SOURCE: CMHC & EQUIFAX CANADA DATA: MORTGAGE DELINQUENCY RATE BY PROVINCE

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credit and debt

NOT QUITE IN GOOD STEAD, BUT LESS IN THE RED

As the need for pandemic-related stimulus and support wanes, federal government finances make a meaningful march away from the mendoza line.

As quickly as they were implemented they became things of the past (we hope!): CERB. CEWS. CEBA. The financial supports for businesses and households that were swiftly put into place early in the pandemic were hugely impactful, providing a sort of bridge financing through what was always going to be a transitory economic disruption. But these things cost money, and at a time when government tax revenues were also down, the result was monthly federal deficits here in Canada like we had never before seen, beginning in earnest in April 2020, when the monthly budgetary balance fell

to -$42.8 billion. Indeed, through the remainder of 2020, the average monthly federal deficit was -$26.3 billion, compared to average of -$1.3 billion over the prior three years. The good news (in addition to said accumulated debt costing less to service today than at any point in history) is that federal deficits, since then, have been shrinking, averaging -$11.3 billion, including a $3.6 billion surplus in December 2021—another sign that we are getting close to putting the pandemic economy in our rearview mirror.

(NO?) DEFICIT OF SPENDING

$10

$3.6 B

-$10

-$5.2 B

-$20

monthly average Mar 2020 -Dec 2020 -$26.3 BILLION

-$30

monthly average Jan 2021 -Dec 2021 -$11.3 BILLION

-$40

-$50

DATA: MONTHLY BUDGETARY BALANCE (BILLIONS $), CANADA

SOURCE: STATISTICS CANADA. TABLE 10-10-0133-01

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credit and debt

SPENDING TO SAVE —the economy, that is—is not as important today as it was during the depths of the pandemic. As such, a return to balanced- budget territory is welcomed. ›

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demographics

04. demographics

A confluence of factors results in rapid growth in BC’s population at the end of 2021. Expect this trend to continue in 2022.

THE 3 MOST IMPORTANT WORDS IN REAL ESTATE: MIGRATION, MIGRATION, MIGRATION

At the micro level, real estate is all about location—for the better or the worse. Show me a property with views, waterfront, or a little separation from the urban plebeians and I’ll show you a property that, all else being equal, has more value than the alternative. At the macro level, housing markets are supported by a variety of economic, financial and demographic factors. Here in British Columbia, migration to the province and its regions has supported demand and buttressed prices over the recent past. This has come through clearly in the most recent data on quarterly population changes in the province, with all of BC's growth in Q4 2021—and then some—coming via net migration. (A total of 1,089 were lost through the process of natural change, which is the difference between the number of births and deaths in a period.)

Notably, net international migration, which includes those here temporarily (like students and workers with visas) and those here more permanently (immigrants), added 19,324 people during the quarter—in contrast to the 3,462 people added in the same quarter one year earlier in the thick of the pandemic. An additional 3,333 people settled in BC from other parts of the country (again, on a net basis), as this province’s strong labour markets, lifestyle features, and approach to navigating the pandemic attracted more people than any other province or territory in the country. Elevated immigration targets, the lowest unemployment rate in the country, and, well, mountains and ocean mean elevated migration levels, and the associated heightened demand for housing, which will continue for the foreseeable future.

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demographics

POPULATION SUPERFLUX

25,000

20,000

19,324

15,000

14,850

10,000

7,332

5,000

4,878

3,462

3,333

-1,064 -1,089

-5,000

POPULATION CHANGE

NATURAL INCREASE NET INTERPROVINCIAL MIGRATION

NET INTERNATIONAL MIGRATION

SOURCE: QUARTERLY DEMOGRAPHIC STATISTICS, STATISTICS CANADA DATA: TOTAL BC POPULATION AND COMPONENTS OF POPULATION CHANGE, QUARTERLY

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demographics

THE SIMPLEST OF EQUATIONS

How and where a region’s population grows depends almost entirely on where housing is being added. You don’t say…

With the initial batch of 2021 Census data having been released earlier this year, we were able to get our first view into how our communities changed over the preceding five years (dating back to the previous Census in 2016). Perhaps to enhance the drama associated with it all—or to help with user digestion of the data, or both—Statistics Canada releases its Census data not all at once but according to a predetermined schedule, with February’s release (the first of many in 2022) focussing on total population and total dwelling counts. Though there are countless insights we could have shared in this space, being limited to only 270 words means we’re required to stay focussed. As such, the insight we have to share here is that—wouldn’t you know it—population and housing growth are highly correlated. Put more colloquially, if you build it, they will come; if you don’t, they won’t.

Between 2016-2021, Metro Vancouver’s dwelling stock grew by 7.5% and its population grew by 7.3%, Within the region, it’s largest municipalities also saw a close correspondence between their dwelling and population growth rates: for Vancouver, it was 6.1% and 4.9%, respectively, and for Surrey it was 7.7% and 9.7%. Conversely, Port Moody’s dwelling stock, which grew by only 2.1% over five years, Housing isn’t the only factor influencing population growth, but it’s an important one (accounting for close to half the expected change in population). To the extent that communities are interested in not only creating diversity through new population additions but also in grown-up kids, greying seniors, and everyone in between having the option to remain in the community as they age, new housing supply should be given due consideration. yielded negative population growth, at -0.05% (a net loss of 16 people).

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demographics

IF YOU BUILD IT, THEY WILL COME

14%

LANGLEY TOWNSHIP

12%

RICHMOND

BURNABY

NEW WESTMINSTER

10%

MAPLE RIDGE

COQUITLAM

VANCOUVER

BOWEN ISLAND

SURREY

NORTH VAN DISTRICT

DELTA

PORT COQUITLAM

WEST VANCOUVER

PORT MOODY

-2%

-5%

15%

20%

10%

CHANGE IN POPULATION

SIZE OF TOTAL POPULATION IN

SOURCE: STATISTICS CANADA 2021 CENSUS DATA: CHANGE IN POPULATION AND DWELLING STOCK BY MUNICIPALITY, METRO VANCOUVER

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demographics

THE LABOUR MARKET BECKONS

Having successfully breached the 400,000-mark for permanent resident admissions in 2021, the federal government sets ambitious new targets.

Not unlike most other industrialized nations across the globe, Canada has an aging population…challenge. How do we maintain a vibrant economy, continue to innovate, pay for the myriad public services we currently enjoy, and afford our rising health care bills as we get older when our labour force is growing at a pace of below 1% per year? We invite young, educated, and skilled people from other countries to join us. Canada is in fact doing just that, with one of the highest immigration rates in the world at 0.85% of its existing population. And after

the pandemic halved our immigration flow in 2020, new, ambitious targets were introduced to both fill in that migrant gap and continue to support labour market and economic growth. Now, the federal government has again raised (and extended) its immigration targets, with Canada now aiming for approximately 450,000 permanent resident admissions by 2024. If history is any barometer of the probability of success, you can bet these targets will be achieved, to the benefit of our prospects of economic growth.

OLD TARGET ACHIEVED, NEW TARGETS CONCEIVED

500,000

451,000

447,055

450,000

431,645

405,315

400,000

350,000

341,175

321,055

300,000

250,000

200,000

184,575

150,000

100,000

50,000

CURRENT TARGETS

TARGET PREDICTIONS

PREVIOUS TARGETS

SOURCE: IMMIGRATION, REFUGEES, AND CITIZENSHIP CANADA DATA: ANNUAL INTERNATIONAL IMMIGRATION TO CANADA AND FUTURE TARGETS

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demographics

PARADIGM SHIFT The once-unthinkable aim of admitting more than 400,000 permanent residents to Canada in a year—because it seemed unachievable—is now a fixture of our national demographic policy. ›

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housing

05. housing

Never before have conditions been so challenging for those looking to move up in our housing market. Something’s got to give.

MEASURING THE EVER-WIDER MOVE-UP CHASM

It’s no secret that Metro Vancouver’s housing market—heck, housing markets across Canada…and the United States…and almost everywhere—have been on an upward trajectory over the past couple of years. This realized destiny was anything but guaranteed when the pandemic began in early-2020, with Canada’s housing authority (the Canada Mortgage and Housing Corporation, or CMHC) actually predicting an 9-18% average home price decline through the balance of 2020 and into early 2021. Welp, that certainly didn’t happen, now did it? Turns out, generous fiscal supports, historically-cheap money, an inability of people to spend on some of the things they normally did (like holidays), and a pandemic- driven narrowing in on what we most desire in and from our homes—as places to not only live, but to work and play, too—have driven up demand and decimated supply. Prices are up across the board.

An interesting and unanticipated artifact of these historically-unique housing market dynamics is that the price differential between home types has risen to astronomical levels. For example, the most recent gap between the benchmark condo price and its townhome equivalent, at more than $169,200, is seven times what it was before the pandemic began. Similarly, the almost-$920,000 difference between benchmark townhome and detached home prices dwarfs the $700,000 gap during the 2016 market peak, and is more than $300,000 higher than pre-pandemic times. Needless to say, this is problematic, as it is arguably more difficult than ever for households to move “up market”, short of receiving a windfall from lottery winnings or the Bank of Mom & Dad. While the opportunities for downsizing abound, we expect these unsustainably-high gaps to close somewhat in 2022 as a result of natural market forces, making it a little bit easier for some households to make their next move.

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housing

MINDING THE GAPS

$1,000,000

the great suppression MARCH

$920,000

$900,000

$800,000

$707,400

$700,000

$600,000

$500,000

$400,000

$300,000

$200,000

$169,200

$100,000

TOWNHOME CONDO DETACHED TOWNHOME

DATA: DIFFERENCE IN BENCHMARK PRICE VALUE BETWEEN DETACHED & TOWNHOME, TOWNHOME & APARTMENT IN VANCOUVER REGION, MONTHLY

SOURCE: REBGV & FVREB

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housing

NOT BUYING THE FIRST-TIMER STORY?

The “true” first-time home buyer narrative is in the eye of the (be)holder of the data—some of which we’ll have to wait for.

With housing prices at all-time highs—and increasing faster than at almost any other time in our history—as supply struggles to be framed as anything but constrained, it’s natural to be concerned not only about peoples’ ability to move within the market (refer to the previous page for a brief discussion on that topic), but perhaps more so the ability of first-time home buyers to actually buy a home for the first time. But what does the data tell us? This may come as a surprise to some, but the number of first-time home buyers in Metro Vancouver has actually increased every year since the BCMinistry of Finance began publishing such data. Specifically, the 4,343 first-time home buyers in 2018 rose to 4,644 in 2019, to 5,114 in 2020, and further to 5,602 in 2021. This is pretty compelling evidence that despite rising prices and limited supply, first-time home buyers are finding ways to continue to get in on the action.

Of course, storylines are rarely so simple. When considered as a share of all transactions in Metro Vancouver, first-time home buyers in 2021 accounted for 6.8% of purchases, down from 8.8% in 2020, and 9.6% in 2019. So in some ways, you can latch on to the narrative that suits your needs best: that first-time home-buying activity is waning per its share of all sales, or that first-time home- buying activity is on the rise per the count of first-time home purchases. The reality is that we need more data to fully understand the real dynamic at play here. With this in mind you can bet we’ll be following the data through 2022 to see if that declining first-time home buyer share actually translates to waning first-time home buyer counts, as we saw in the latter half of 2021.

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housing

TURBULENCE IN FIRST-TIME HOME BUYER TRENDS

700

14%

9.6% of purchases 4,644 FTHB’S

8.8% of purchases 5,114 FTHB’S

6.8% of purchases 5,602 FTHB’S

600

12%

4,343 FTHB’S

500

10%

400

300

200

100

NUMBER OF FTBH’S

FTBH’S SHARE OF ALL PURCHASES %

DATA: MONTHLY SHARE OF COUNT AND VOLUME OF FIRST-TIME HOME BUYER RESIDENTIAL PROPERTY TRANSACTIONS, METRO VANCOUVER

SOURCE: BC GOVERNMENT PROPERTY TRANSFER TAX DATABASE

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housing

For Metro Vancouver, the pandemic created a temporary soft-spot (and opportunity for investors) in the region’s rental market.

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housing

FLEETING AVAILABILITY Include us in the group of market-watchers and commentators who, at the time, thought the rise in Metro Vancouver’s purpose-built rental market vacancy rate in 2020 was a blip on the radar. Remember, after hovering between 1-2% for years leading up to the pandemic, the region’s vacancy rate rose from 1.1% in 2019 to 2.6% in 2020— a more-than-doubling! We actually wrote a paper last year evaluating some of the potential reasons behind this, identifying record new supply and a pandemic that negatively impacted the precise demographic that demands rental housing (primarily younger people, including

students and workers in hospitality) as the primary culprits. Not surprisingly, then, we watched as Metro Vancouver’s rental vacancy rate snapped back to 1.2% near the end of 2021 as international students returned and our economy more fully reopened. With relatively strong demographic and economic tailwinds expected to influence this market over the coming few years (at least), the opportunity for investors to buy low, and for renters to enjoy some rent relief, may have passed us by.

GREATLY EXAGGERATED "REPORTS OF THE DEATH OF": THE RENTAL MARKET

8.0%

7.2% 6.6%

7.3%

6.0%

5.1% 5.0% 4.6%

4.9%

3.9%

3.8%

4.0%

2.7% 3.3% 3.4%

3.4% 3.0% 2.5%

3.1% 2.4%

2.6%

2.0%

1.7%

1.5%

1.2%

1.1%

0.0%

VANCOUVER

TORONTO

MONTRÉAL

OTTAWA

EDMONTON

CALGARY

WINNIPEG

QUÉBEC CITY

SOURCE: CMHC DATA: YEAR-OVER-YEAR CHANGE IN PURPOSE-BUILT RENTAL APARTMENT VACANCY RATE, SELECTED CMA’S

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housing

YOU CAN’T COMPLETE WHAT YOU DON’T START

After years of neglect, Metro Vancouver’s purpose-built rental market is finally being tended to through the addition of thousands of new homes.

Across Canada, purpose-built rental markets have been the recipients of inadequate attention—at least insofar as new supply is concerned. Here in Metro Vancouver, the stock of purpose-built rental homes has in fact dwindled by 1% since 1991 as the population has expanded by 68%, resulting in one per-capita measure of rental housing prevalence—the number of rental homes per 1,000 residents—declining from 72 to 42 (a 41% drop) over that period.

Has the tide turned in recent years? Data on rental housing completions suggest this might be the case, with the region adding an average of 5,400 purpose-built rental homes annually over the past five years, versus an average of just over 1,300 annually over the prior 25 years. For the sake of a balanced rental market and affordable rents, let’s hope this continues.

SAY WHAT? VANCOUVER RENTAL ADDITIONS OUTPACE TORONTO

EDMONTON 3,859

CALGARY 2,996

MONTRÉAL 12,965

VANCOUVER 6,679

TORONTO 4,282

SOURCE: CMHC DATA: PURPOSE-BUILT RENTAL APARTMENT COMPLETIONS, SELECTED CMA’S, 2021

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